econ 131 ch 21

During recessions, taxes tend to

fall and thereby increase aggregate demand

According to the liquidity preference theory, an increase in the overall price level of 10 percent

increases the equilibrium interest rate, which in turn decreases the quantity of goods and services demanded.

Changes in the interest rate

shift aggregate demand if they are caused by fiscal or monetary policy, but not if they are caused by changes in the price level.

The Federal Open Market Committee is

the group at the Federal Reserve that sets monetary policy.

When income is $10,000, consumption spending is $6,500. When income is $11,000, consumption spending is $7,250. For this economy, an initial increase of $200 in net exports translates into a(n)

$800 increase in aggregate demand in the absence of the crowding-out effect.

If a $1,000 increase in income leads to an $800 increase in consumption expenditures, then the marginal propensity to consume is

0.8 and the multiplier is 5

In the short run, open-market purchases

increase investment and real GDP, and decrease interest rates.

Suppose an increase in interest rates causes rising unemployment and falling output. To counter this, the Federal Reserve would

increase the money supply

When the Fed buys government bonds, the reserves of the banking system

increase, so the money supply increases

A tax cut shifts the aggregate demand curve the farthest if

the MPC is large and if the tax cut is permanent

Which of the following shifts aggregate demand to the left?

A decrease in the money supply

Which of the following events could explain a shift of the money-demand curve from MD 1 to MD 2 ?

A decrease in the price level

Initially, the economy is in long-run equilibrium. Aggregate demand then shifts leftward by $50 billion. The government wants to increase its spending in order to avoid a recession. If the crowding-out effect is always one-third as strong as the multiplier effect, and if the MPC equals 0.6, then by how much do government purchases have to increase in order to offset the $50 billion leftward shift?

By $30 billion

When taxes decrease, interest rates

increase, making the change in aggregate demand smaller.

While a television news reporter might state that "Today the Fed raised the federal funds rate from 1 percent to 1.25 percent, " a more precise account of the Fed's action would be as follows:

"Today the Fed told its bond traders to conduct open-market operations in such a way that the equilibrium federal funds rate would increase to 1.25 percent. "

Suppose the multiplier is 5 and the government increases its purchases by $15 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Also, suppose the horizontal distance between the curves AD1 and AD3 is $55 billion. The extent of crowding out, for any particular level of the price level, is

$20 billion.

Which of the following would not be an expected response from a decrease in the price level and so help to explain the slope of the aggregate-demand curve?

With prices down and wages fixed by contract, Fargo Concrete Company decides to lay off workers.

If net exports fall $40 billion, the MPC is 9/11, and there is a multiplier effect but no crowding out and no investment accelerator, then

aggregate demand falls by 11/2 × $40 billion

In recent years, the Federal Reserve has conducted policy by setting a target for the

federal funds rate

Fiscal policy refers to the idea that aggregate demand is affected by changes in

government spending and taxes

If the Fed conducts open-market purchases, the money supply

increases and aggregate demand shifts right.

If the current interest rate is 2 percent,

people will sell more bonds, which drives interest rates up.

When the Federal Reserve decreases the federal funds target rate, the lower rate is achieved through

purchases of government bonds, which reduces interest rates and causes people to hold more money.

An increase in the money supply will

reduce interest rates, increasing investment and aggregate demand.

As the interest rate falls to equilibrium in the market for money ,

the quantity of money demanded rises, which would reduce a surplus of money.